No party will be able to take the pain

Mar 4 2010 by Peter Jackson, The Journal

ARE the markets right to give a vote of no confidence in sterling? As I write, it is down against the US$ for the sixth day at US$1.49 – its lowest for 10 months.

Even against the euro, which is shackled to the corpse-like Greek economy, it is in decline.

The consensus is that, in a General Election year, the currency markets are taking fright at the narrowing opinion polls pointing to a hung parliament. But is that rational?

After all, all three major parties agree on the need to cut the UK’s ballooning deficit, now forecast to come in at £175bn this fiscal year – a post-war record as a share of GDP.

Furthermore, a hung parliament presents the only reasonable chance for the much admired Vince Cable to become Chancellor of the Exchequer, for if either main party was to be forced into coalition with the Liberal Democrats, he would be a strong contender for the post.

Perhaps the markets, like me, are underwhelmed by the prospect, believing that Vince is nowhere near as clever and has been nowhere near as consistently right as he and his many admirers like to pretend.

But, that aside, are the forex traders being irrational in their fear of no party getting an overall majority? I don’t think so.

In the event of a hung parliament, all the parties – including whichever ones form the Government – will have one overriding concern, and that will not be the state of the public finances, but the soon-to-held next election.

A Government in such circumstances will manoeuvre and scheme to make itself popular and wrong-foot the opposition into being unpopular.

It is estimated that public spending growth, currently running at 7.1%, will have to be cut to something like 2% and that will mean pain – lots of pain.

To give an idea, without tax rises and benefits reform, there will have to be substantial cuts, by as much as 12%, if spending on health, children, schools and families is protected.

No coalition or minority Government will do this, unless forced into it by the IMF. Preserve us from a hung parliament.

:: Peter Jackson is a freelance journalist and former Journal business editor p.jackson77@btinternet.com